Is Turkey getting stronger, or is it buying time? The balance sheet of the Turkish economy on the axis of debt, reserves, and external vulnerabilities

Economies, like companies, are evaluated not only by their income statements but also by their balance sheets. No matter how positive growth figures, export increases, and production data may appear, an incomplete picture emerges when the rising debt burden, dependence on external financing, and liabilities transferred to the future are not taken into account. Turkey is at exactly such a crossroads today. On one side, there are reserves reaching historical levels, improvements in credit ratings, and tight monetary policies implemented within the scope of the fight against inflation; on the other, there is a growing public and external debt stock, rising financing costs, and deepening liabilities toward the outside world.

For this reason, the real issue is not how much the economy is growing, but with what resources this growth is financed and to what extent it is sustainable. Is Turkey entering a path of permanent development by increasing its production power, efficiency, and competitive capacity; or is it buying time by consuming the resources of the future today with an increasingly heavy debt burden? The answer to this question lies not only in growth rates; but in the debt stock, the quality of reserves, the need for external financing, and the country's financial position against the global economy.

When the current macro balance sheet of the Turkish economy is examined from this perspective, a complex outlook emerges that contains both promising elements and factors that must be monitored carefully. While on one side there are strengthening Central Bank reserves and a risk perception that has partially improved in international markets; on the other, high external financing needs, foreign exchange liabilities sensitive to exchange rate movements, and a growing debt stock continue to exist as the economy's primary areas of vulnerability. Is the Turkish economy truly getting stronger by entering a qualified and sustainable growth path, or is it merely buying time with an accumulated debt burden?

DEBT STOCK AT HISTORICAL LEVELS: Growing Debt, Heavier Burden

One of the most striking indicators regarding the balance sheet of the Turkish economy is the public debt stock, which has grown rapidly in recent years. According to the Ministry of Treasury and Finance's June 2026 Public Debt Management Report, the central government gross debt stock has reached approximately 15 trillion TL. Considering current exchange rate levels, this amount corresponds to approximately 328 billion US dollars.

Approximately 60% of the total debt stock consists of domestic debt, and 40% consists of external debt. Looking at the currency composition, 48% of the debt is in Turkish lira, 33% in US dollars, and 9% in euros. More importantly, 7.7 trillion TL of the total debt consists of foreign currency and foreign currency-indexed liabilities. In other words, more than half of the central government debt stock exhibits a structure sensitive to exchange rate movements.

The interest structure of the debt stock also reveals a striking outlook. 65.7% of the total debt consists of fixed-rate, 29.3% of variable-rate, and approximately 5% of inflation-indexed liabilities. Especially the tight monetary policy and high-interest environment implemented in the last two years have significantly increased the cost of new borrowing and have noticeably increased the interest burden on public finance.

Of course, in economic literature, borrowing is not evaluated as a negative indicator on its own. In fact, when managed correctly, debt is an important financing tool that supports growth and development. However, the fundamental factor that determines whether debt is sustainable is its quality rather than its quantity. At this point, three critical questions come to the fore: At what cost is the debt taken? In which areas are the obtained resources used? And most importantly, is the income capacity to ensure the repayment of this debt sufficient?

If borrowing is directed toward productive investments, technological transformation, and efficiency gains, it can provide its own financing by creating higher income in the future. Conversely, borrowing that finances current expenditures and does not increase economic capacity becomes a heavy burden on public finance over time.

The main debate for Turkey today is exactly where this is knotted. The question of at what costs this debt is rolled over and what economic transformation it finances is more important than the size of the debt stock. Because rising interest expenses not only strain budget balances; they also create increasing pressure on many public expenditure items, from education to health, from social support to infrastructure investments. The relationship between the quality of economic growth and debt sustainability becomes evident at exactly this point. Debt can be a tool for development to the extent that it increases production and efficiency; otherwise, it causes the growth of financial burdens left to the future.

DOMESTIC DEBT OR EXTERNAL DEBT? The Anatomy of the Exchange Rate, Interest, and Debt Spiral

Focusing only on the total amount of debt in debt management is often misleading. What is decisive for economic stability is the currency in which the debt is denominated, the maturities at which it is carried, and the economy's capacity to meet these liabilities. For this reason, the composition of debt is more important than its size in public finance and real sector balance sheets.

Treasury data shows that 51.6% of the central government debt stock consists of foreign currency and foreign currency-indexed liabilities. This ratio indicates that the Turkish economy's sensitivity to exchange rate movements remains at high levels. Because every increase in the exchange rate not only raises import costs and inflation, but also increases the Turkish lira equivalent of public debt.

Today, considering the Treasury's foreign currency-denominated debt stock of approximately 227 billion dollars, it is seen that every 1 TL increase in the exchange rate increases the public debt burden by approximately 227 billion TL. Moreover, there is no need for new borrowing for this increase. The exchange rate movement alone is sufficient to increase the value of the debt stock in TL terms.

A similar vulnerability is seen in private sector balance sheets. Approximately 302 billion dollars of Turkey's 518.5 billion dollar gross external debt stock belongs to the private sector. The remaining 192 billion dollars belong to the public sector, and 24 billion dollars to the CBRT, and the ratio of Turkey's Gross External Debt Stock to GDP is at the level of 31.6%.

This situation creates a significant area of risk, especially for companies with limited capacity to generate foreign currency income. Because when the exchange rate rises, not only production costs but also the repayment burden of debts increases. For this reason, external borrowing makes the economy more vulnerable to exchange rate shocks unless supported by foreign currency-earning activities. Foreign currency liabilities that are not balanced by export revenues, tourism revenues, and international service revenues create pressure on financial stability over time.

The "exchange rate-interest-debt" cycle that the Turkish economy has been struggling with for many years also stems largely from this structural problem. As the exchange rate rises, the debt burden increases; the rising risk perception pushes interest rates up, and rising interest rates increase the financing costs of both the public sector and the private sector. Thus, the economy is squeezed between cost pressures triggered by exchange rate movements and a high-interest environment.

At the root of the problem lies the growth model dependent on external financing. Economies that cannot produce sufficient savings and cannot permanently increase foreign currency revenues through high value-added exports are forced to use more external resources during growth periods. Although this supports growth in the short term, it increases vulnerability to external shocks in the long term.

ARE RESERVES STRENGTHENING BUT ARE THEY SUFFICIENT? How Strong Is the 160 Billion Dollar Shield?

One of the most visible results of the monetary policies implemented in the last two years has been the significant recovery in the Central Bank of the Republic of Turkey's reserves. The increase recorded in reserves, which were seen as one of the most vulnerable areas of economic management for a long time, is an important development both in terms of the message of confidence given to financial markets and the protection capacity created against external shocks.

According to CBRT data, gross international reserves have exceeded the 160 billion dollar threshold and reached historical highs. According to the latest data, official reserve assets are at the level of 162.6 billion dollars. 54.7 billion dollars of this amount consists of foreign currency assets, 100.2 billion dollars of gold reserves, and 7.7 billion dollars of IMF reserve position and SDR assets.

At first glance, this picture gives the impression that Turkey exhibits a strong outlook in terms of external financing capacity. Indeed, the improvement in reserves stands out as an important element in the recent evaluations of international investors and credit rating agencies. However, in financial analysis, the quality and usage capacity of reserves are as important as their size.

Because reserves are not just a number; what is really important is how much of these resources can be used freely and to what extent they increase the country's power to meet its short-term liabilities. For this reason, when economists evaluate reserve adequacy, they focus not only on gross reserve size but also on net reserves, swap transactions, and short-term external debt.

The point that draws attention here is the high external financing need that Turkey faces in the next twelve-month period. According to CBRT data, the short-term external debt stock by remaining maturity is at the level of approximately 242 billion dollars. In other words, the total of external liabilities that need to be paid or rolled over within the next year is well above the current gross reserves.

On the other hand, the public sector's short-term foreign currency liabilities have also reached a significant size. The total short-term foreign currency liabilities of the Central Bank and the central government are at the level of 116.9 billion dollars. 51.2 billion dollars of this consists of predetermined liabilities, and 65.7 billion dollars consists of contingent liabilities. While these data do not diminish the value of the improvement in reserves, they do not mean that existing vulnerabilities have completely disappeared. Reserves are an economy's defense line; however, for this defense line to be permanently strengthened, there is a need not only for portfolio inflows and short-term capital movements but also for structural transformations that increase production capacity.

Indeed, past experiences show that the resilience provided by reserves remains vulnerable unless supported by permanent foreign currency-earning activities. Increasing the technology intensity of exports, diversifying tourism revenues, strengthening logistics and service exports, and increasing foreign direct investments are of critical importance in this regard.

TURKEY'S INTERNATIONAL INVESTMENT POSITION: We Owe the World 392 Billion Dollars

To evaluate an economy's financial situation against the outside world, looking only at external debt figures is not enough. Because the position of countries within the global financial system should be evaluated not only by how much they owe but also by the assets they possess abroad. For this reason, one of the most comprehensive indicators that economists refer to when analyzing a country's external balance sheet is the International Investment Position (IIP).

The International Investment Position shows the difference between the financial assets of domestic residents abroad and the assets and claims of non-residents in the country. In a sense, this indicator is a balance sheet table that reveals whether a country is a net creditor or a net debtor to the rest of the world. The May 2026 data of the Central Bank of the Republic of Turkey points to a striking picture in this regard. While Turkey's external assets are at the level of 403.7 billion dollars, the total financial rights and claims of foreigners on Turkey have reached 795.4 billion dollars. As a result, Turkey's net International Investment Position deficit has occurred at the level of 391.7 billion dollars.

Beyond being a technical statistic, this figure provides important clues about the Turkish economy's growth model. Because a net deficit of approximately 392 billion dollars shows that economic activities have been financed significantly by external savings and foreign capital for many years. In other words, Turkey exhibits an economic structure that supports more investment and consumption than it produces and saves with external resources. The high deficit in the international investment position also brings with it three main areas of risk: First, the problem of dependence on external financing continues. The fact that economic growth is significantly dependent on external resource inflows increases sensitivity to changes in global financial conditions. In the event that interest rates rise or risk appetite decreases in international markets, access to external financing can become difficult, and as a result, growth performance and financial stability can come under pressure.

Second, risks arising from exchange rate and capital movements maintain their importance. The fact that foreign liabilities in Turkey have exceeded 795 billion dollars increases the impact of changes in the direction of global capital flows on foreign exchange markets and financial markets. This vulnerability becomes more visible, especially in periods when the risk perception toward developing countries deteriorates.

Third, the problem of structural vulnerability continues. While the recent increase in reserves and improvements observed in credit ratings are positive developments, the high deficit in the net investment position shows that the need for financing from the outside world continues. Therefore, short-term improvements cannot completely eliminate the economy's sensitivity to external shocks unless supported by structural transformations.

At this point, an important distinction must be made. The fact that a country is a net debtor to the outside world is not a crisis indicator on its own. Many developed economies of the world also carry net liabilities to a certain extent. However, the decisive factor is in which areas these liabilities are used and the economy's capacity to generate income to meet these liabilities in the future. If external resources are directed toward high value-added investments, technology production, efficiency gains, and the development of export capacity, the income to be created in the future can meet today's liabilities. However, if resources are primarily transferred to consumption, short-term financing, or areas that create low efficiency, external dependence deepens even further over time.

For this reason, the main goal for Turkey should not be just to find new financing, but to realize an economic transformation that will gradually reduce the net International Investment Position deficit. The permanent solution lies not in borrowing more, but in building a production structure that earns more foreign currency, produces more technology, and provides higher efficiency. The 391.7 billion dollar IIP deficit shows that there is still a significant area of vulnerability in the Turkish economy's balance sheet against the outside world. Although the increase in reserves and improvements in financial indicators are positive developments, the true measure of long-term economic resilience will be the success of structural transformations that reduce dependence on external financing and pull down net external liabilities.

DEBT SERVICE: The Real Issue Is Not Finding Debt, But Rolling It Over

In economic management, finding financing is often a manageable process. However, the real indicator that reveals a country's financial resilience and economic strength is its capacity to repay its debts rather than its borrowing capacity. Because taking on debt is a choice, while being able to roll over debt is a test of economic confidence and sustainability.

This is exactly the main issue that the Turkish economy faces in the coming period. High-amount debt repayments originating from the public sector, the banking sector, and the private sector will continue to keep the need for financing at the top of the agenda in the coming years. Recent developments in financing conditions make this picture even more striking. While the Treasury was borrowing at a level of approximately 36 percent in two-year bond issues at the beginning of 2026, interest rates for the same maturity borrowings rose to levels of 42 percent in the middle of the year. Interest rates on five-year TL-denominated bonds approached 39 percent, and on ten-year bonds, they approached 35 percent levels.

This picture clearly shows the cost of the tight stance in monetary policy on public finance. Indeed, while the Central Bank of the Republic of Turkey keeps the policy interest rate at the 37 percent level, the fact that the interest rates demanded by the market from the Treasury have risen to higher levels reveals that risk perception and inflation expectations are still strong.

The rise in borrowing costs does not only mean that new debts have become more expensive. It also results in the growth of resources allocated from the budget to interest payments and the creation of additional pressure on public expenditures. A portion of the resources that could be used for education, health, social support, infrastructure investments, and technology investments is being directed toward interest expenses. On the other hand, a striking change is also observed in the composition of borrowing. The fact that the weight of foreign currency and gold-indexed borrowings has increased alongside Turkish lira-denominated borrowings in recent years increases the sensitivity of public finance to exchange rate and market risks. While this provides financing flexibility in the short term, it can create new areas of vulnerability in the long term.

According to CBRT data, the amount of external debt that the public, banking sector, and private sector need to pay or roll over within the next twelve months according to remaining maturity reaches approximately 242 billion dollars. This figure clearly reveals why the Turkish economy needs external financing channels to remain open. These repayments and re-borrowings to be carried out in a high-interest environment will continue to create a significant burden on budget balances.

Of course, Turkey has significant experience from the past regarding debt sustainability. The public sector and the banking sector have been able to renew their debts with high rollover ratios in international markets for many years. However, in a period when global interest rates are rising, geopolitical risks are increasing, and capital movements are becoming more selective, the cost of this process is increasing gradually.

For this reason, the measure of success in the coming period will not be just finding new financing. The real success is the ability of the economy to create a production and income structure that will reduce the need for external resources. Because the fundamental factor that facilitates debt service is not finding new debt, but being able to generate strong foreign currency revenues.

Increasing high-technology exports, strengthening foreign direct investments, spreading value-added production in industry, and reducing dependence on imported inputs are of strategic importance in this regard. As long as permanent foreign currency-earning activities do not strengthen, debt rollover will continue to be one of the most sensitive topics of the economy.

PUBLIC NET DEBT STOCK AND EU-DEFINED DEBT: Figures Are Reassuring, Interest Rates Are Worrying

One of the elements frequently emphasized in international evaluations regarding the Turkish economy is that public indebtedness is at relatively low levels compared to many developed and developing countries. Indeed, according to Ministry of Treasury and Finance data, as of 2026, the Public Net Debt Stock is at the level of 8.6 trillion TL, corresponding to approximately 13.6% of the Gross Domestic Product (GDP). The EU-Defined General Government Debt Stock, calculated according to European Union methodology, is at the level of 23.8% of GDP with approximately 15 trillion TL.

These ratios present a positive outlook at first glance in international comparisons. Because the European Union's Maastricht Criteria foresee an upper limit of 60% for the ratio of public debt stock to GDP. While average public indebtedness in European Union countries has hovered in the 80-90% band in recent years, this ratio is well above 100% in some countries. Viewed from this perspective, the ratio of Turkey's debt stock to national income appears more manageable compared to many countries.

However, in macroeconomic analysis, the factor that is as important as the size of the debt stock, and often even more important than it, is the cost at which the debt is financed. Because the economic burden of two countries with the same debt ratio can produce completely different results due to the difference between borrowing interest rates. For example, while Germany, the Netherlands, or other economies with high credit ratings can carry out their long-term borrowings at costs of 2-3 percent levels; Turkey is forced to borrow at much higher interest rates due to higher inflation expectations, risk premium, and financing costs. Therefore, even if the ratio of debt stock to national income is low, the burden of this debt on the budget is felt much more heavily.

Actually, Turkey's fundamental problem also emerges here. What needs to be discussed is not only the amount of debt, but the cost this debt imposes on the economy and the budget. Because every new issue made to roll over the debt stock in a high-interest environment creates an additional burden on public finance. This burden increases the share of interest expenses in the budget over time and narrows the usage area of public resources. In other words, the fact that the debt ratio is low does not mean financial comfort on its own. If debt is rolled over at high costs, the pressure on the budget continues to grow. Indeed, the rapid rise of interest expenses in the central government budget in recent years confirms this fact. The increase in resources allocated to interest payments limits the resources that could be transferred to areas that support long-term development, such as education, health, social protection, scientific research, and infrastructure investments.

At this point, indicators such as credit ratings, risk premium, and investor confidence become even more important. Because a country's borrowing cost is influenced not only by economic data but also by the perception of confidence in the markets. The decrease in the risk premium and the increase in investor confidence can enable the same debt stock to be managed at much lower costs.

Therefore, the success criterion for Turkey should not be just keeping public debt ratios low. The real goal is to be able to create the economic and institutional ground that can permanently pull down borrowing costs. Ensuring price stability, maintaining predictable economic policies, strengthening legal security, and improving the investment environment are among the fundamental components of this process. The main goal before Turkey is not just to keep the debt stock under control; it is also to establish the economic confidence environment that can permanently reduce the cost of this debt.

WHY IS A CREDIT RATING NOT JUST A LETTER? One Notch Rating, Billions of Dollars of Impact

Another element that is as important as economic indicators, budget balances, and growth performance is the perception of international investors regarding the country's economy. One of the most visible indicators of this perception is the evaluations of credit rating agencies. Because in today's global financial system, countries can find funds not only with their economic performance but also with their reliability in financial markets. International credit rating agencies give a credit rating by evaluating a country's capacity to repay its debts, its economic and political stability, its external financing need, and its macroeconomic outlook. These ratings are not just a symbolic evaluation, but also an important reference that directly affects countries' borrowing costs and conditions of access to international capital.

The more orthodox economic policies implemented in Turkey recently, the increase in predictability in monetary policy, and the recovery observed in reserves have also been reflected in the evaluations of credit rating agencies. Indeed, while Moody's kept Turkey's credit rating at the "Ba3" level in its July 2026 evaluation and determined its outlook as "stable"; Fitch Ratings confirmed the credit rating at the "BB-" level and maintained the outlook as "stable" again. These evaluations indicate that a certain stability process is being followed in the Turkish economy after the rating increases experienced in recent years. However, when the reports of credit rating agencies are examined carefully, it is seen that some fundamental conditions are specifically underlined for the rating increases to become permanent.

At the head of these conditions come ensuring a permanent decline in inflation, reducing the need for external financing, strengthening reserve adequacy, maintaining the predictability of economic policies, and implementing structural reforms with determination. In other words, the sustainability of the improvement in credit ratings depends not only on short-term financial indicators but also on the economy's structural transformation capacity.

To understand why credit ratings are so important, it is enough to look at their impact on borrowing costs. Because the generally accepted relationship in financial markets is quite clear:

Credit Rating Increase › Decrease in Risk Premium (CDS) › Lower Borrowing Cost

As a country's credit rating rises, investors' risk perception decreases. The decrease in risk perception allows the state and the private sector to borrow at lower interest rates. Thus, while the interest burden on the budget lightens, companies' access to investment financing also becomes easier.

Conversely, a low credit rating causes the country to pay a higher risk premium. The high CDS levels that Turkey has been facing for many years are one of the most concrete indicators of this situation. As the risk premium rises, the Treasury's Eurobond issuance costs increase, and the access of banks and real sector companies to external resources becomes more expensive.

More importantly, Turkey is still below the "investment-grade" category in international rating scales. This is not just a matter of prestige. Many large pension funds, insurance funds, and institutional investors in the world cannot directly invest in countries that are below the investment-grade rating due to their internal regulations. Therefore, Turkey's current rating level continues to be one of the significant obstacles before long-term and low-cost capital inflows. For this reason, every improvement in credit ratings should not be evaluated only as a positive message given to financial markets. Rating increases also mean lower interest costs, stronger investor confidence, higher foreign direct investment potential, and a more sustainable growth ground.

However, the critical point here is that credit rating increases are a result, not an end. Permanent rating improvements emerge as the natural result of an economic structure where price stability is ensured, legal security is strengthened, institutional capacity is increased, productive investments are encouraged, and external vulnerabilities are reduced. In other words, credit ratings are not the cause of the economy, but the mirror of the economy. For Turkey, the goal should not be just to obtain a few notches of rating increase. The real goal is to create the economic ground that will facilitate access to the long-term and low-cost resources of global capital by rising back to the investment-grade country category. Because every permanent improvement to be achieved in the credit rating will reflect positively on all areas of the economy, from growth to employment, from investments to public finance.

CONCLUSION: Building the Future with Production, Not Debt

The current outlook of the Turkish economy deserves neither wholesale pessimism nor unmeasured optimism. The data shows that, on one hand, the economic policies implemented recently have produced significant gains in some areas; on the other hand, structural vulnerabilities largely maintain their existence. Strengthening Central Bank reserves, improvements seen in credit ratings, and steps taken toward re-establishing fiscal discipline are important gains for economic management. However, the public debt stock reaching approximately 15 trillion TL, the 391.7 billion dollar net International Investment Position deficit, high external financing need, and the foreign currency liabilities of the real sector continue to be areas of risk that the economy needs to manage carefully.

Actually, all the indicators discussed throughout the article point to the same truth: Turkey's fundamental issue is not finding debt, but reducing the need for debt. Because sustainable development is built not on an economic structure that constantly seeks new financing sources; but on a production model that can increase its own savings, produce high value-added, and create a strong income capacity against the outside world.

This is exactly the fundamental dilemma that Turkey faces today. Short-term capital inflows, high-interest policies, or temporary financing opportunities can contribute to the preservation of economic balances. However, these tools do not produce permanent prosperity on their own. The source of permanent prosperity is an economic structure that produces technology, increases efficiency, raises the value per kilogram in exports, invests in qualified human resources, and climbs to the upper rungs in global competition.

For this reason, measuring economic success only with growth rates can be misleading. What is important is how the economy grows as much as how much it grows. Consumption increases financed by debt can create a temporary vitality; however, growth models not supported by productive investments reveal a higher debt burden, higher interest costs, and a more vulnerable economic structure over time.

Indeed, the size of Turkey's external financing need, the foreign currency position of the real sector, the high debt rollover requirement, and the deficit in the international investment position show that the growth model has not yet been able to fully get rid of dependence on external resources. The element that will change this picture is not new borrowing opportunities; but structural transformations to be realized in the production structure.

The roadmap before Turkey is actually quite clear. Increasing production based on high technology, accelerating the efficiency transformation in industry, investing more in education and human capital, strengthening legal and institutional capacity, encouraging foreign direct investments, and increasing the value-added of exports constitute the fundamental pillars of this transformation.

Because economic history has taught us the same lesson many times. Permanent prosperity is achieved not by increasing borrowing capacity; but by strengthening the capacity to produce, develop innovation, and create value. Debt can be a tool for development when used correctly; however, it is not development itself. Economies, like people, have a memory. Problems postponed today return as higher costs of tomorrow. Every period of relief bought with debt means a heavier repayment obligation and a more difficult financing test when the day comes.

For this reason, the real issue for Turkey is not finding new debt sources; it is creating new sources of value production. True economic power is measured not by how much debt can be found from the outside; but by how much technology can be produced inside, how much efficiency can be achieved, and how much sustainable prosperity can be created.

In summary, the question that will determine Turkey's future is not whether it can borrow; but whether it can build an economic structure that needs less borrowing. The difference between development and borrowing emerges exactly here: Debt can accelerate growth, but what ensures sustainable development is production, efficiency, technology, and human capital.